Medtronic’s Growth Strategy At Work In Strong Q1 Results

Medical device manufacturer Medtronic (NYSE:MDT) posted strong revenue growth across the board in the first quarter of fiscal 2016 in its earnings release on September 3rd. ^[1] The company was hammered by currency headwinds as expected, but achieved good organic revenue growth across all divisions and geographies. Medtronic’s three-pronged growth strategy certainly seems to be working, as regular progress is being made in all the three tiers, namely therapy innovation, globalization and economic value. ^[2] The seamless integration of the Covidien acquisition and resurgence in procedures in the U.S. are expected to help Medtronic maintain its growth in the near future.

First quarter revenues expanded by 12% year on year on a comparable, constant currency basis and reached $7.3 billion. Growth was nearly evenly spread out across all of the company’s four divisions. However, the Patient Monitoring and Recovery, Spine, and Neuromodulation sub-segments underperformed relative to the rest of the company and achieved only single-digit revenue growth. Non-GAAP diluted EPS stood at $1.02 in the first quarter, which is an expansion of 400 basis points on a comparable constant currency basis. ^[3]

Medtronic does not provide quarterly guidance, but the company reiterated its guidance of 4-6% revenue growth on a constant currency comparable basis in fiscal 2016.

Our price estimate of $70 for Medtronic is nearly the same as its current market price.

See our complete analysis for Medtronic here

Medtronic’s Growth Strategy in Action

As mentioned earlier, Medtronic’s growth strategy revolves around innovation, globalization and economic value. The company is taking concrete steps in each of these focus areas, which are paying off dividends in the form of steady growth. Under the innovation arm, Medtronic has been introducing new therapies every quarter, and claims that it is witnessing “strong acceptance for its new therapies across all groups”, although it does not report specific data on adoption rates. ^[2] Medtronic’s R&D expenditure as a percentage of revenue has hovered around 9% since 2008 even as its revenue has grown steadily, underscoring the focus on innovation. This is accompanied by a steady acquisition strategy to reinforce Medtronic’s capabilities and ensure its participation in future growth frontiers, as demonstrated by the Twelve Inc. acquisition. (Read: Medtronic Bets Nearly Half a Billion Dollars on the Transcatheter Mitral Valve Market)

Under the globalization arm, Medtronic is attempting to consolidate its presence in emerging markets and is witnessing encouraging trends in India, China and Russia despite the recent macro turbulence. In the first quarter, the company failed to achieve its baseline goal of 150 to 200 basis points year on year revenue growth because of supply chain optimization in Saudi Arabia. ^[2] Revenues from Saudi Arabia are not reported separately, so the impact of the supply chain disruption on the broader emerging markets cannot be ascertained. Nevertheless, the disruption in the first quarter is likely to result in benefits in the following quarter, as seen from the supply chain optimization in China. The importance of emerging markets for Medtronic can be surmised from the fact that in the first quarter, revenue growth in emerging markets was near or greater than that of developed markets in all but one division. Only the Cardiac and Vascular Group (CVG) expanded at a slower pace in emerging markets than in developed markets. ^[3]

Lastly, in the economic value focus area, Medtronic is expanding its Cath Lab Managed Services business, which is expected to boost its services and solutions business. The company is also paving the way in implementing “value-based payment models” like bundle payment initiatives, as well as risk sharing models with hospitals.

In summary, we believe that Medtronic is taking significant and concrete steps in putting its three-pronged growth strategy to work. These steps can be directly linked to specific aspects of growth in the company’s business, which leads us to believe that the company’s growth strategy is yielding results. With the top line taken care of, Medtronic now needs to ensure that the Covidien integration is completed smoothly and the expected synergies from the acquisition are realized in full.

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More Trefis Research

1. Medtronic Investor Relations [↩]
2. Medtronic Fiscal 2016 First Quarter Earnings Call Transcript, Seeking Alpha, September 3, 2015 [↩] [↩] [↩]
3. Medtronic Fiscal 2016 First Quarter Earnings [↩] [↩]